Chemical Conundrum

A chemical takes a long and winding journey from the production line to the consumer. Take, for example, acrylamide.

A U.S. company manufactures acrylamide and sells it to another domestic company, which uses it to make polycarbonate resin, a binding agent in many paints. This company exports its resin to a distributor in the EU. The distributor then sells it to two companies, both of which use the resin to manufacture paint. One of these EU companies sells its paint to a furniture company; the other to a toy manufacturer.

The company that started the chain reaction, the acrylamide producer, probably has no clue that its product is now plastered on European furniture and toys.

But on April 1, 2007, chemical companies will be forced to account for who is using their products at the end of that chain or risk being barred from the European market.

That's when the EU is slated to adopt the Registration, Evaluation and Authorization of Chemicals (REACH) law. It will require chemical importers and manufacturers to register chemicals they sell or produce in the EU. It also will require them to report the chemicals' uses--meaning they must be aware of every potential purchaser in their supply chain.

U.S. chemical producers will not be immune from the sweeping legislation. Although REACH puts the burden for testing and registration on the EU importer, many experts predict that importers will shift that burden to U.S. chemical producers.

"REACH kills innovation," says Steve Russell, senior director and counsel for the American Chemistry Council. "Companies are going to be so preoccupied just going through the steps to comply that they're not going to have time to look for new markets, not to mention the costs of complying with the law."

Reach Requirements

REACH aims to foster public health and protect the environment by banning hazardous chemicals from the EU market. Hazardous chemicals are those identified as causing serious and irreversible effects to humans and the environment, including carcinogens, reproductive toxicants and mutagens. The European Commission will use its discretion in deciding which specific chemicals to restrict.

This is the first unified legislation the EU has implemented to regulate the chemical industry. Government agencies didn't begin evaluation or testing of any of the 100,000 chemicals on the European market until 1981. That year, a patchwork of directives charged officials in each country with testing chemicals for health and safety risks. But this process failed, and officials only completed testing on 28 chemicals by 1993.

REACH is meant to correct this. It shifts the burden to the manufacturers, requiring them to put chemicals through a rigorous testing regime and then register them with the newly established European Chemical Agency (ECA), before selling them on the EU market. Some estimate that the required testing will cost about $30,000 per chemical.

"One idea behind this approach is that the EU will phase out the more high-risk chemicals because manufacturers are going to say there's no sense in paying for testing because it's going to fail," says Darren Smith, partner at Reed Smith.

REACH requires manufacturers to provide the ECA an assessment of the health and safety risks for each use for their chemicals, of which there could be hundreds. This is where things get messy.

"The EU has said, 'one substance, one registration,'" says Jim Searles, partner at Steptoe & Johnson's Brussels office. "But that's not [really accurate]. Part of this is registering the uses of downstream users as well."

REACH will require chemical producers to know, in detail, their entire supply chains--from wholesalers, to distributors, to end users. It's this part of REACH that will affect U.S. producers.

Exporter Obligations

Although REACH places the burden of registering chemicals with the importers, no importer is going to want to pay an exporter's entry into the EU market.

"Importers will likely turn around and ask their suppliers to start funding the testing regime and appropriate certification," Smith says.

Testing is only a fraction of the total cost for getting a chemical into the EU under REACH. There are additional fees for hazardous chemicals and for those imported in large quantities. For example, the legislation requires importers to pay a separate authorization fee for each use of a chemical deemed dangerous. The going rate for one use authorization, of which there could be dozens for any given chemical, is $70,000.

While registrations and authorizations will be a financial drain on exporters, that doesn't take into account the time and money they will have to devote to determining all the uses of the chemical down the supply chain. Few supply chains are linear in nature.

For example, urea, a chemical produced commercially from ammonia and carbon dioxide, is found in plastics, glues, fertilizers, cigarettes and lotions. For many of these products, urea is only a component of another chemical that goes into the product. This means the urea producer has to account for all intervening parties that process or add things to the chemical before it hits the market as part of a consumer product.

Furthermore, even if a U.S. company simply integrates a raw chemical into another substance that's shipped to Europe for further refinement, that company is now part of the supply chain and must report its use to its supplier in order to continue selling to Europe.

"To prepare for REACH, companies will need to produce an inventory of all substances used, identify their status in the supply chain of each listed substance and contact suppliers to verify steps they are taking to ensure REACH compliance," says Ulrich Ellinghaus, partner in Baker & McKenzie's Frankfurt, Germany office.

Early Sign-Up

Companies can save themselves some pain by taking advantage of the directive's pre-registration period. Pre-registration lasts for 18 months after REACH's April 2007 adoption and offers participating companies extended deadlines for full compliance of up to 11 years.

If a chemical is pre-registered, then the deadline for when that chemical must be fully registered varies based on two factors--level of concern and tonnage.

For chemicals deemed of high concern--including carcinogens, mutagens and reproductive toxicants--the deadline is three years. The same deadline applies for all chemicals present in quantities greater than 1,000 tons per year. Substances manufactured or imported in quantities between 100 and 1,000 tons get a six-year deadline, while those sold in quantities of less than 100 tons have 11 years.

The penalty for not pre-registering is dire. The EC has the authority to ban any chemical that is not pre-registered until the producer has completed the onerous registration and testing process.

Pre-registering is a relatively easy process. An importer or manufacturer must provide the ECA with its name and address, a pre-assigned chemical identification code number and envisaged deadline for completing the registration process based on the substance and quantity it plans to distribute.